But when Hampton and the federal Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) jointly began the undercover cigarette case in June 2010, they decided not to proceed under those federal rules, said Teresa Hinson, then the ATF's resident agent-in-charge of the Hampton Roads region.

There are no state laws that pertain to churning. Now, the City of Hampton is requesting a Virginia Attorney General's opinion on whether local police agencies are within their power to conduct churning operations.

City Manager Mary Bunting said that because there is no state law either enabling or prohibiting churning, the city wants a higher comfort level before deeming it proper. "We believe clear guidance from the Attorney General is needed," she wrote in a statement to the media last week.

That guidance is being sought after the fact, however.

Hampton's Blue Water Tobacco company — an undercover business created to crack down on cigarette tax evasion and other crimes — saw more than $3 million flow through its checking account during the 19-month operation.

Money generated by the operation was used not only to buy more cigarette product, but also to purchase nine cars and SUVs, fund out-of-town training trips for officers, and buy electronics, among other expenses.

The operation, which did not lead to any arrests, was shut down by Police Chief Charles R. Jordan Jr. in January after an officer came to him with a misconduct allegation pertaining to officer spending. The case is now the subject of an internal investigation.

Federal requirements

In a federal churning case, people or businesses that are being investigated must be approved in advance; all funds must be used "to offset necessary and reasonable expenses" of the operation; and detailed audits must be performed. Those audits must be sent to the U.S. Attorney General's Office following an investigation, with a report also sent to Congress.

The rules are so strict that cars used in the operation must be leased, not purchased. Some of the items purchased during an operation, such as photocopiers, must often be destroyed when the operation is over. And any leftover money must be sent straight to the U.S. Treasury.

But with no state laws pertaining to churning, the state Attorney General's Office has not provided a clear answer to the Daily Press on whether law enforcement agencies can simply decide on their own to run churning operations.

"Local law enforcement might cite the Virginia code provision that grants local jurisdictions its broad powers, but there is no Virginia code provision that deals with churning directly," said Caroline Gibson, a spokeswoman for the Attorney General's Office in Richmond.

The law cited by Gibson grants cities and counties "all powers" that are not prohibited by the state constitution or general laws, so long as they "are necessary ... to secure and promote the general welfare" and such things as "safety, health, peace, good order, comfort, convenience, morals and trade."

Any churning authority in Virginia, Gibson added, "will be granted on a local level."

But when asked last week whether a police department, sheriff's office or other agency can simply grant themselves the authority — without the involvement of anyone else in local government — Gibson did not get back with an answer as of press time for this story.

A need for accountability

In Hampton's case, members of the City Council said they didn't know about the more than $718,000 in Blue Water Tobacco's account until it was reported in late September as part of an investigation by the Daily Press.

Others high in city government — such as Bunting and City Attorney Cynthia Hudson — also said they didn't know about the millions of dollars flowing through the churning account until the investigation was halted in January.

Money raised through churning is distinct from criminal forfeiture funds, experts say. Those are funds seized during investigations, used as evidence in court, ruled forfeited by judges, and doled back to localities for appropriations to law enforcement.

Whatever the Attorney General's Office says on churning, the requested opinion could have a wide-ranging impact, not only in Hampton but for other law enforcement churning accounts statewide.

A critical question, for example, is how such churning operations square with existing state laws that give budgetary appropriation powers solely to elected governing bodies — such as city councils and county boards — and not the police.

A government accounting expert, Virginia Auditor of Public Accounts Walter Kucharski, said the reason for such laws is fundamental — so that the people's elected representatives get to decide how public money is spent.

He also cited policy, liability and accountability reasons for elected councils and boards to aign off on all appropriations. If an employee makes a purchase without such a budgetary authorization, Kucharski said, the council can demand the money be repaid from the employee's own pocket.

Bunting, however, has stated that according to the city's legal interpretation, churning funds, as the "ongoing fruits" of a criminal investigation, "did not require prior appropriation by Council as they were not 'public funds' in the sense contemplated by the appropriations statute."

Hudson has also cited a 2006 Attorney General's opinion, unrelated to a law enforcement operation, which defines "public funds" in a way that leads the city to conclude that churning funds are not necessarily included in that definition.

City Councilman Donnie Tuck has weighed in on the other side. "It's not just a private operation of the police department," he said two weeks ago. "It's still public money."

Origins of the operation

An ATF special agent first approached Hampton in the spring of 2010 with the idea for an undercover cigarette sting operation.

The idea was to crack down on cigarette bootleggers — people trying to profit by buying cigarettes in low-tax states and selling them in high-tax states — and related crimes. Under the agreement, the ATF supplied the caseloads of cigarettes and money for a warehouse lease.

Hinson, then the resident agent-in-charge of the ATF's Hampton Roads region, said that she and the Hampton Police Division decided to go with what she termed "state churning" because of the time-consuming process for getting federal churning approved.

"It was easier to get up and running if you used state churning authority rather than federal," she said. "The federal rules required too long a process, and you can lose (investigative) targets in the process."

Though ATF officials in Washington strongly preferred that its agents in the field use federal churning authority, a source said, there was no requirement that they do so.

Hinson said that while ATF officials in Washington were aware of and approved the joint Hampton operation, she doesn't recall a process for getting state churning authority approved. "I was not aware of any approval that HPD was required to obtain regarding the joint investigation," she said.

But at meetings, Hinson said, Jordan always made clear that he wanted the proper protocols to be followed. "The chief was very concerned that everything was done absolutely right, by the book," she said.

Three months into the investigation, in October 2010, two Hampton officers learned that a federal ATF agent working with Hampton on the stings was corresponding with a customer on the side. The agent was later convicted of embezzlement and other charges and is now serving a three-year term in federal prison.

The ATF immediately pulled out of the operation, Hinson said. She said prosecutions were "tainted" by the ATF agent's corruption and that her agents were more interested in focusing on gun cases than on cigarette stings.

Hampton pressed forward, however, without the ATF's involvement. Three months later, in January 2011, Blue Water Tobacco made some of its largest purchases in the entire case — $395,000 for nine vehicles, most of them unmarked SUVs.

City documents show that the undercover operation slowed down for the next couple months, with bank account statements showing lighter churning activity in February and March of 2011.

A later 'understanding'

In late March 2011 — five months after the ATF backed out of the case and after hundreds of thousands of dollars had been spent — then-Commonwealth's Attorney Linda D. Curtis signed off on a Memorandum of Understanding with Jordan. Jordan had signed the document a month earlier.

Under that agreement, the "day-to-day supervision and administrative control" of the cigarette investigation would be under the police, and Curtis' office would screen the cases for prosecution, determining which cases would be prosecuted in state courts and which ones should go federal.

Toward the bottom of the three-page agreement is a paragraph pertaining to the "churning of funds."

"Authorization is granted to utilize revenue(s) derived through investigatory actions throughout the course of the investigation(s)," the memorandum says. "Those revenues shall be used to offset all investigative expenditures as related to this investigation and covert operations."

The agreement went on to say that "approval to expend such revenue" will rest with Hampton Police Division and that "all accumulated revenue" at the end of the case "shall be disposed of in a manner and means in accordance with applicable federal and state laws."

Jordan says the memorandum amounts to Curtis' signing off on and authorizing a police churning operation. In a statement last week, Bunting appeared to agree, saying Jordan's conclusion is a "reasonable" one.

"This document specifically references the churning operation and uses the language that the churning activity is 'authorized' to occur," Bunting wrote of the memorandum. "It is reasonable that HPD relied on this (memorandum) as a basis for proceeding with the operation."

Curtis, who retired in February, contends the memorandum does not indicate that she was authorizing the churning to take place. "I don't interpret it that way," she said. "What I agreed to do was screen and prosecute the cases."

Curtis pointed out that the undercover operation had already been running when the memorandum was signed. "The operation had been going on for some time at that point," she said, so she thought the Hampton Police Division already had any necessary churning authority.

The language in the agreement, Curtis maintains, would have been different if she was granting the police the authority to churn. It would have said something like, "the Commonwealth's Attorney grants churning authority to the Hampton Police," she said, rather than, "Authorization is granted."

Curtis said she had never looked into churning authority under state law — and she says she would not have assumed that she had the power to grant it. "I don't know of any authority I had over the fiscal management of the police department," she said.

The most relevant part of the memorandum, Curtis said, was that her office would screen cases before they were filed with the magistrate's office. "That's different from the normal procedure" of prosecutors taking over after the magistrate signs off on a case, she said.

No arrests, no audits

Curtis said the police never brought her any cases to prosecute during the 19 months that the cigarette investigation was running.

Sometime this spring — after Jordan halted the cigarette sting — police brought a state prosecutor about six cases to see if they could move forward. But the prosecutor said that while the cases were solid, he couldn't go forward because some of the officers under investigation were key witnesses.

Another section of the memorandum signed by Jordan and Curtis calls for a significant amount of auditing to be done on the cigarette account.

"Monthly and quarterly audits of the operation will be conducted by the administrative and operational supervisors to ensure all accounts and inventories are accurate," the agreement reads. "A yearly audit will be conducted by an independent accountant to verify all accounts are accurate and up to date."

But no independent audit was conducted on the Blue Water Tobacco account during the 19-month operation — or for nine months after it ended.

Bunting said last week that the city had hired an outside auditor and outside attorney to look into the company's transactions and the operation. Jordan has been placed on paid administrative leave as those reviews proceed.

Gov. Terry McAuliffe reminded law enforcement leaders from across the commonwealth on Thursday that their efforts to keep communities safe are vital to attracting business – and a detractor when officers fail.